Bay city rolling

The Special Economic Zone of Xiamen is China's economic miracle in a compact, convenient and, by Chinese standards, bite-size portion.

Occupying an island and the surrounding bay on the western side of the Taiwan Strait, and with a population of just 2.1 million, Xiamen is a prosperous city that thinks and acts well beyond its physical size.

Blessed with a large natural harbor, it is situated strategically halfway between Shanghai and Hong Kong. Its location also places it a short swim from the Taiwanese islands of Jinmen and Matsu, making Xiamen both a military as well as a commercial frontline in China's relations with the "renegade province." Indeed, many Taiwanese trace their roots back to Fujian province, speak the same dialect and consider the Xiamen area their ancestral home. As a result, today Taiwanese investment, both direct and indirect – via Hong Kong, for example – is one of the biggest drivers behind its booming economy. Indeed, Taiwan is thought to account for a substantial chunk of the 47% of inward "foreign" direct investment (FDI) officially on the books as coming from Hong Kong.

Taiwan officially contributed 21% of overseas investment in the city in 2003, according to government data.

Declared a Special Economic Zone (SEZ) in 1980, and now one of five such zones in the country, Xiamen offers investors a range of special incentives, primarily a corporate tax rate of just 15% compared to 30% nationally. Like the other SEZ pioneers, such as Shenzhen in the southern province of Guangdong, Xiamen was originally seen as an experimentation ground for China's economic reform program.

It's an experiment that has had phenomenal results, turning a sleepy agricultural backwater and rundown colonial port into one of the most vigorous technology-driven economies in China.

Today, Xiamen is home to China's seventh busiest container port and its fourth busiest interntaional airport and is the principal commercial gateway to Fujian, one of China's richest provinces. In the 24 years since it became an SEZ, Xiamen's economy has enjoyed an average annual growth rate of more than 18%. In 2003, when growth was a more "modest" 17.2%, its per capita GDP climbed to about US$6,420, making it one of China's top five richest cities.

Overwhelmingly, that growth has been driven by investment from more than 6,000 foreign and overseas enterprises, Cai Nanyong, director at the Xiamen Foreign Investment Bureau, told China Economic Review. Foreign enterprises, he said, account for a massive 84% of the city's total production value, 64% of its export value and 40% of its tax revenue.

Among the biggest overseas investors and employers are PC manufacturer Dell and photography giant Kodak. Dell's sprawling facility is the company's principal Chinese assembly and customer service center. Xiamen also serves as a major hub for Dell's Asian manufacturing network.

Kodak operates a US$750 million plant, making film and disposable cameras, as well as operating as the global center for the collection, recycling and reprocessing of disposable cameras.

For both companies – among 35 Fortune 500 companies with operations in the city – Xiamen represents their biggest China investments by far.

One big international draw is the annual China International Trade Fair, during which Xiamen plays host to thousands of potential new investors eyeing up the latest opportunities China has to offer. It is China's only nationwide investment showcase and the most recent 2004 fair drew more than 12,000 overseas investors to the city.

For city and province alike, it is an opportunity to impress. In the first day of the 2004 fair, for example, Fujian province signed up investments worth more than US$2.5 billion. "Our main advantages, and the key to our success, are our geography and our size," Cai said. "Our geography puts us at a strategic location, halfway between Shanghai and Hong Kong and close to Taiwan, one of our biggest investors – while our size means that everything in the city is within easy reach." Xiamen's compactness has also given it a reputation as one of China's most livable cities, an image cultivated by a city government which puts the stress on cleanliness, safety and conservation. Added to that, Xiamen is also one of China's quieter cities, thanks in part to a ban on the use of car horns, a law that would send Shanghai's cab drivers into nervous withdrawal.

"We believe that preserving the environment makes Xiamen a place where investors want to come; a place where people want to invest, want to live and want to do business," Cai added. "Our goal is to be seen as a clean, high technology bay city." It was not always so. Xiamen was one of the first of the so-called Treaty Ports opening to foreigners in 1841 in the wake of the First Opium War. Then known as Amoy, the city quickly grew into a bustling commercial center and saw the opening of several foreign consulates – leaving the city a rich colonial-era architectural legacy, much of which survives to this day.

Xiamen's early commercial fortunes, however, quickly overwhelmed its virtually non-existent sewage system and, while it continued to prosper, it acquired a reputation as one of the filthiest cities in China.

To be fair, mid-nineteenth century China boasted many title contenders. But perhaps because of that, Xiamen made a determined effort to build a reputation as China's cleanest city. Government marketing material, for example, promotes Xiamen as a "Garden City" and emphasizes awards won: Among other accolades, Xiamen has been named China's "Model City for Environmental Protection" – and less prosaically, "national Sanitary City."

It has won international awards too, recently being awarded the Scroll of Honour by the United Nations' human settlements agency, UN-HABITAT, the only city in the world cited for the award in 2004. Rick Turner, Xiamen-based president and CEO of China Solutions, a business consultancy, said the award was a reflection of the careful planning that had gone into making the city what he called one of China's "hidden secrets."

"The city government has a very good understanding of what it can do to support business and investors and a very clear picture of where they want Xiamen island to be," he added. "They're also very choosy about identifying the kind of business they want to attract – they won't just take foreign investment for the sake of it. There's a very careful qualification process." As an island city, he said, officials tend to be wary of land being squandered so they look extra carefully at proposed projects to see which best benefit Xiamen. Investment approvals have also been more cautious in the wake of a 1999 multibillion dollar smuggling case – involving cars, oil, tobacco and other goods on a massive scale – an event which, Turner said, shook much of Xiamen's business community.

It was the biggest smuggling operation in the history of the People's Republic. Of the 600 people alleged to be involved, more than 300 were tried and convicted – several getting the death penalty. There followed a top-to-bottom clean-out of the government, removing what Turner calls system "vulnerabilities" that had allowed the smugglers to operate so brazenly for almost four years.

In short, authorities turned a high-profile scandal into a beacon of renewal. Xiamen today boasts one of the most determinedly clean and transparent local governments in China. "How the government almost goes over the top to make sure that everything is done fairly and correctly," Turner said.

Bullish on Xiamen's future, he has little doubt that the city will emerge as a major business and financial center. "Many cities in China say they want to chase high-tech investment, but Xiamen is one of the few that offers what that kind of investment needs," he said. "It has all the industrial zones you find in the cities like Shanghai, as well as all the requisite banking and legal services companies need." Having helped funnel US$100m-plus investments into China in the two years China Solutions has been running, Turner said that most of his clients looking at investing in Xiamen were exporters. The main attraction: Xiamen's fast-growing port, which the government hopes to develop into a major Asian shipping hub and one of the world's top 20 ports by 2010.

All of the big shipping companies are represented in Xiamen. One of the biggest, Maersk of Denmark, recently began work on a US$363m joint venture to build a container terminal on a 70-hectare site outside the city. Shanghai-based and Hong Kong-listed China Merchants Group, Hong Kong's Hutchison Whampoa and Singapore's PSA Corp have all begun talks on investing in the port.

Scott Ballantyne, a business development manager at European industrial conglomerate ABB, and a city resident for 10 years, has little doubt that Xiamen's small-town feel, combined with big-city business services, puts it on track for successful growth. "If I were 30 years younger, I might want the bright lights of cities like Shanghai," he said. "But from the point of view of business and general livability, Xiamen is undoubtedly a des-res location." He said the city worked hard to get the commercial-environmental balance right and as a result, "Customers and our overseas managers like to come here, and we find that the staff we need to recruit from across China are happy to move here."

Ballantyne said ABB initially decided to set up in Xiamen in 1993 because of its SEZ attractions and because the company's chosen joint-venture partner was located in the city. Since then ABB's Xiamen operations have grown to four factories with 1,000 employees producing low, medium and high voltage relay equipment – proving something of a showcase for both for the company and the city.

"ABB is now one of the highest tax payers in Xiamen. Because of that, we've had very good relations and strong support from the local government." With operations "full to the brim" producing for the China market, the company recently began work on its fifth factory, scheduled to open in 2005.

The city has made an effort to keep up with foreigners' creature comforts, Ballantyne said, citing fast-increasing availability of quality accommodation, international schools, and Western supermarkets either already open or planning to open.

Xiamen has also taken huge strides, he said, in turning itself into a tourist destination. With a welcoming sub-tropical climate, long stretches of sandy beaches (until recently owned by the military) and some of the best preserved colonial architecture of any of the old treaty ports, Xiamen is keen to exploit its tourist potential to the full. "One of the big markets we are looking to develop is the so-called MICE trade," said Simon Jim, manager of the downtown Holiday Inn Crowne Plaza hotel.

MICE – standing for meetings, incentives, conferences and exhibitions – will become increasingly important as the city's hotel industry undergoes massive growth in the coming 12 to 18 months. With Sheraton, Hilton, Sofitel and a 1,500-room Taiwanese-invested international hotel – billed as the largest in China – set to open in the city, Jim said he expected stiff competition coming.

To prepare for that, his hotel is undergoing extensive renovation and expanding capacity. Overall, Jim said, the MICE market has grown by 55% a year for the past three years, boosted by the recent opening of the city's stylish new convention center, now the primary venue for the annual China International Trade Fair.

With its array of international-caliber golf courses and other recreational facilities, its comfortable climate and clean reputation, Jim predicts Xiamen will become one of China's leading MICE venues. Most trade to date has been Chinese, he conceded, "but we're seeing an increasing trend for multinational companies to bring their staff from other countries here, because it's easier to bring them into China than arrange for PRC nationals [to travel] overseas." Another company looking to attract MICE business is the Riyuegu Hotsprings Resort, a Singaporean-invested project 30 kilometers northwest of the city proper. With a 150-room resort and a 60,000 square meter hot springs "theme park" the hotel is already looking to double in size after being open for just a few months, said Deputy General Manager Jason Ong.

"We really need more space to attract the big MICE events," he said. "Xiamen has a reputation as a clean and healthy city, and we expect that with our hot springs, and the spa facilities we're planning, we're looking to build on that." Already offering a range of thermal baths and spring-fed bathtubs in its rooms, he said Riyuegu was in talks with Banyan Tree, Asmara and a range of other spa brands to open Xiamen's first international-standard spa. "With Beijing, Shanghai and other booming east coast cities just one or two hours' flight-time away, there is a really, really big corporate travel market out there."
Like many investors in the city, Ong said Xiamen's economy will really bloom when direct links with Taiwan open up. While direct cargo links with the Taiwanese port of Kaohsiung have eased, cross-strait travelers must fly via Hong Kong and Macau.

When travelers will be released from this frustrating detour will depend, of course, on a thawing of the often-frosty political relations between Beijing and Taipei. But even the most optimistic see little hope of any dramatic changes in the near future.

For most travelers then, that means a journey of at least six hours – not far short of the flying time between New York and London – despite the fact that the main island of Taiwan is less than 150 km offshore. Rick Turner of China Solutions has little doubt the situation will improve in time. "Taiwan and Fujian are already dependent on each other's economies and that will only grow deeper, so it's inevitable that links will have to improve." Riyuegi Resort's Ong agreed: "Every business here is really waiting for that one. Opening direct links with Taiwan, especially flights, is the key to really make the local market boom." Time passes. Twenty-five years ago, Taiwan-Fujian relations were hardly better than those between North and South Korea. But for years now, people from both sides of the strait have been banqueting together like family in Xiamen, and, like families everywhere, complaining about government and regulators – regulators who, for reasons some hardly remember, oblige them to go to Hong Kong almost as a kind of penance before festivities can begin.

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China Economic Review (CER) has been a dependably independent voice on trends and developments in the greater Chinese economy for a quarter century. Our coverage has won recognition from the Society of Publishers in Asia and is widely read by economists, business leaders, academics and students with an interest in one of the world’s most vibrant and complex developing markets.